Essays on Firm Investment and Misallocation

Abstract

My dissertation studies how firm investments respond to market frictions such as corporate taxation, housing booms and how productivities and misallocations evolve in the adjustment processes. In the first chapter, I ask what factors contributed to the heterogeneous investment behavior of small and large firms' equipment investment in China's 2009 Value Added Tax (VAT) reform. I first document empirically that small firms responded more than large firms at both the extensive and intensive margins with a difference in differences design. Then I estimate a heterogeneous firm dynamic investment model and show it is investment adjustment costs, rather than financial frictions that contributed to small firms' more aggressive investment responses. To show the irrelevance of the financial constraints, I also estimate a Chinese version of the Whited Wu (2006) financial constraint index. In the second chapter of my dissertation, I study how the three channels of housing boom: the collateral, the speculation and the crowding out channels affected US manufacturing firms' investment and misallocation over the early 2000s period. I find the traditional collateral channel was very significant during this period as documented by the literature. Both the speculation channel and the crowding out channel were silent . At the aggregate level, using the IV estimation backed by the housing supply elasticity in Saiz (2010), I find the housing boom had a positive effect on productivity growth and the collateral channel dominates the speculation channel and the crowding out channel.In the last chapter of my dissertation studies how labor market frictions in Portugal contributed to its productivity slowdown and misallocation. The Portuguese government enacted several size-dependent labor market laws in 2012 and 2013 that favor small and medium-sized firms. I identify these laws as the sources of the increasing labor misallocations in Portugal with a difference in differences design. Moreover, I construct measures of labor market frictions using the average labor cost gap between small and large firms and then evaluate the effects of the size-dependent labor market laws on labor misallocation and reallocation. I find the size-dependent labor market laws reduced unemployment temporally but exacerbated within industry labor misallocation in the long run.